ImmunoGen: Assessing The Possibility Of A Turnaround

About: ImmunoGen, Inc. (IMGN), Includes: LLY, NVS, ROG, SNY
by: BioSci Capital Partners

ImmunoGen shares recently tumbled due to a negative regulatory binary. Amid this difficulty, there is an excellent opportunity for the company to successfully turnaround with a new trial.

In the Phase 3 FORWARD 1 study, mirvetuximab failed to reach its primary endpoint of progression-free survival. Yet it posted excellent results for patients with high folate receptor alpha expression.

As follows, the FDA requested ImmunoGen to conduct a new Phase 3 study for mirvetuximab as a single-drug (i.e. monotherapy) for platinum-resistant ovarian cancer.

With better endpoint guidance for positive results, I believe that the new investigation will bear excellent outcomes. After all, ImmunoGen now realized that mirvetuximab works best for high folate-alpha expression.

There is an aplenty of cash to fund its highly interesting pipeline. Other molecules have an excellent chance of delivering good results. Altogether, ImmunoGen is an excellent turnaround prospect to reward investors.

People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game. - Peter Lynch

As the bioscience sector is inherently volatile, some investors can be deterred by the excessive swing in the share price like a pendulum. Be that as it may, the opportunistic investors can capitalize on this "market inefficiency" - born out of volatility - to bank sizable profits. As such, whenever a stock of interest tumbled, I usually assess if it's a "value trap." In my due diligence, I'd study up on the underlying cause for the depreciation and more importantly determine if the difficulty is temporary. In case a drug failed to meet its primary endpoint, I'd analyze its other study outcomes. After looking at the latest clinical and regulatory development for ImmunoGen (IMGN), I strongly believe that the recent FDA refusal to grant accelerated approval to mirvetuximab is truly a temporary setback. There is a very good chance that mirvetuximab will yield excellent data in a new investigation in the foreseeable future. Consequently, the turnaround chance of this stock is more than favorable. Investing in a turnaround story can deliver multiple fold returns. Therefore, I'll present a fundamental analysis of the latest development of ImmunoGen and its turnaround prospects.

Figure 1: ImmunoGen chart (Source: StockCharts)

About The company

As usual, I'll provide a brief corporate overview for new investors. If you are familiar with the firm, I recommend that you skip to the subsequent section. Headquartered in Waltham Massachusetts, ImmunoGen is focused on the innovation and commercialization of antibody-drug conjugate ("ADC") to manage a vast number of cancer indications. As the recognized ADC leader, ImmunoGen has successfully licensed its technology to numerous companies. A notable firm, Roche (OTCQX:RHHBY) is using ImmunoGen's ADC for its flagship molecule, Kadcyla.

Other interesting partners include Eli Lilly (LLY), Novartis (NVS), Sanofi (SNY), and Takeda (NYSE:TAK). As of mid-2016, ImmunoGen secured 765 worldwide patents with 749 pending. The said figure tells me that ImmunoGen has very strong intellectual property protection. And, it's strategic that the firm is deploying revenues generated from the partnership to power its organic pipeline development as shown below. In my view, the two-pronged approach - that procures revenue from outlicensed drugs for brewing in-house innovation - is quite prudent.

Figure 2: Therapeutic pipeline (Source: ImmunoGen)

Antibody-Drug Conjugate Platform

A discussion of ImmunoGen would be incomplete without going over ADC platform's merits. After all, the most value of this investment resides in ADC. As its name implied, there is a conjugation or fusion of an antibody to a cytotoxic "payload" in ADC. The specificity of antibody enabled for highly targeted tumor destruction while limiting the potential toxicity. As a result, ADCs can be administered at a higher dosage to achieve maximum therapeutic efficacy with minimum toxicity.

Figure 3: Underlying science of ADC (Source: ImmunoGen)

Conferred with improved efficacy and tolerability, ADCs are more advantageous than conventional chemotherapy that, in and of itself, exerts the indiscriminate killing of rapidly dividing cells. Because rapidly dividing cells include cancer cells as well as cells lining the gastrointestinal tract and hair cells, chemotherapy usually induces significant hair loss, nausea, and vomiting. Conversely, ADC medicines subject the patients to less vomiting and hair loss.

Mirvetuximab Soravtansine

After a Type C meeting with the FDA, ImmunoGen announced that the agency requested a new Phase 3 trial for mirvetuximab as monotherapy for patients suffering from platinum-resistant ovarian cancer. Of note, ImmunoGen was pushing mirvetuximab for accelerated approval based on data from the Phase 3 FORWARD 1 trial. In my view, the new study will be focused on patients with a high level of folate receptor alpha ("FRA") expression.

Published on March 1, 2019, FORWARD 1 demonstrated mixed results. As mentioned, mirvetuximab failed to reach its primary endpoint of progression-free survival for the overall population yet the secondary outcome was positive for the high FRA-expressed group. Commenting on the study results, the Associate Director of Clinical Research at the Stephenson Cancer Center at the University of Oklahoma (Dr. Kathleen Moore) noted,

Even though FORWARD 1 did not meet its primary endpoint, I continue to be impressed with the efficacy and tolerability of mirvetuximab in ovarian cancer patients, especially in the subset with high FRA expression. I look forward to continuing to work with ImmunoGen to analyze the Phase 3 data and determine the most appropriate path to bringing mirvetuximab to those patients who benefit most from it.

Notably, cancer is quite difficult to cure due to its high "mutability." This intrinsic characteristic makes cancers adept at causing treatment relapse. Moreover, some tumors are much difficult to treat than others. And, ovarian cancer is definitely one of the most difficult to treat diseases. To decimate these rogue cells, combination therapy is designed as the cornerstone of oncology management. By suppressing multiple cancer targets simultaneously, there is significantly less time for cancers to evolve for evading immune detection. Hence, I'm much more optimistic in the combination study of ADC with other cancer drugs than the monotherapy mirvetuximab.

Interestingly, ImmunoGen is fully aware of the advantages of the combination regimen for cancer. However, the fact that the company still chose to investigate mirvetuximab as monotherapy for the highly resistant ovarian cancer signifies their confidence in this drug. The fact that mirvetuximab posted positive results for its secondary outcome justified ImmunoGen's approach. In other words, ImmunoGen is confident with just a "single punch" to knock out of ovarian cancer rather than doing a combo.

In the aforesaid Type C meeting, ImmunoGen sought approval of mirvetuximab as monotherapy based on FORWARD 1 alone. Due to the lackluster primary endpoint, it's understandable that the FDA advised against accelerated approval using the secondary outcome. In realizing the tremendous unmet needs for platinum-resistant ovarian cancer, the FDA is eager to help ImmunoGen designs a new Phase 3 trial. The agency certainly didn't tell ImmunoGen to abandon mirvetuximab.

It's interesting food for thought that perhaps, if it's up to the former FDA Commissioner (Dr. Scott Gottlieb), ImmunoGen would have succeeded. In my opinion, the new interim commissioner (Dr. Nes Sharpless) somewhat raised the regulatory hurdles for all drugs and medical devices. Commenting on the situation, the Senior Vice President and Chief Medical Officer (Dr. Anna Berkenblit) remarked,

We are encouraged by the consistent signal of anti-tumor activity and the favorable benefit-risk profile in patients with high Folate Receptor Alpha expression in our Phase 3 FORWARD 1 trial. We appreciate the constructive engagement with FDA and look forward to aligning with the agency on the design of a new registration trial in this population.

In my view, mirvetuximab is an excellent drug. The issue here is not its efficacy. Perhaps, mirvetuximab did not achieve its primary outcome because ImmunoGen used a "weird" statistical test. It raised the statistical significance cutoff to an unreasonable level. And yet, the fact that patients with high FRA expression demonstrated robust response is proof that the drug is efficacious. Hence, I strongly believe this binary event will not decimate ImmunoGen. The company still has plenty of cash and excellent pipeline prospects. The comment by the President and CEO (Mark Enyedy) resonated with my belief. Per Enyedy,

Our meeting with FDA enabled us to clarify a regulatory path forward for mirvetuximab and we are evaluating all avenues to bring this promising therapy to ovarian cancer patients. The mirvetuximab combination cohorts continue to advance and, with approximately $270M on the balance sheet as of the end of Q1, we remain focused on developing innovative ADC therapeutics and delivering more good days to people with cancer.

Financial Assessment

Since an earnings report reveals important information, I'll assess the 1Q2019 report for the period that ended on March 31. ImmunoGen procured $8.6M revenues compared to $19.8M for the same period a year prior. This represents a 56.5 % revenue decrease. Based on royalty alone, the revenues for both quarters were correspondingly similar (i.e. $8.5M and $7.2M).

That aside, the research and development (R&D) expenses registered at $38.9M versus $44.8M, thus signifying a 13.2% YOY decrease. Specifically, FORWARD 1 patients enrollment accounted for a higher cost in the prior period. Additionally, there was $43.8M ($0.30 per share) net loss versus $38.6M ($0.30 per share) decline for the same year-over-year (YOY) comparison. On a per share basis, the bottom lines are exactly the same.

Regarding the balance sheet, there was $270.4M in cash and equivalents and thereby underlies a 3.0% increase from $262.4M last year. The proceeds generated from sales of the residual rights to Kadcyla in January strengthened the balance sheet. Based on the $50.2M quarterly OpEx, I expect there is adequate capital to fund operations for more than a year prior to the need for a public offering.

Notably, it's the norm for a young bioscience company to raise capital through an offering so long as dilution is not excessive. After all, it's better for the balance sheet rather than taking on bank debts that can be recalled prematurely. In my view, I like to see an annual dilution rate of 30% at most. And, I noticed that ImmunoGen has a modest dilution rate because the shares outstanding increased by only 13.1%, going from 130.6M to 147.8M.

Figure 4: Key financial metrics (Source: ImmunoGen)

Potential Risks

At this point in its growth Phase, the most important risk for ImmunoGen is if the company can post positive clinical outcomes for the new Phase 3 trial. The study will assess mirvetuximab monotherapy for platinum-resistant ovarian cancer. Perhaps, the trial will only study patients with high FRA expression. The other concern related to whether the combination therapy brewing in the pipeline will achieve positive clinical results. I ascribed an overall 35% chance of clinical binary failure. Moreover, there is the added uncertainty associated with the interim FDA Commissioner, Dr. Sharpless taking the helm. I'm not familiar with his policy, so I lowered the chance of regulatory success to account for the uncertainty. That aside, there is a chance that ImmunoGen can overexert itself and thus runs into cash flow constraint.

Final Remarks

In all, I maintain my recommendation on ImmunoGen a strong buy with the five out of five stars rating. ImmunoGen is powered by the "time-tested" platform technology, ADC. Already outlicensed to reputable companies that innovated blockbusters like Kadcyla of Roche, the proof of efficacy and safety of ADC is compelling. The recent regulatory setback of mirvetuximab created an excellent opportunity for investors to accumulate shares in this grower. If the other pipeline molecules (i.e. the combination therapy) starts to roll in positive results - and I believe they will - the market sentiment will shift in favor of ImmunoGen. Nonetheless, I'm not counting out mirvetuximab based on the observed response for the subpopulation with high FRA expression.

While this stock is not for investors with the weak a stomach, if you are bold and patience, ImmunoGen may reward you handsomely. After all, a successful turnaround nearly always delivers multi-bagger returns. Based on its stellar pipeline prospects and the composite data posted, I strongly believe that ImmunoGen has a very good chance of making a comeback. Nevertheless, it's worthwhile to point out that investors are still "shell shock" from the recent FDA Type C meeting. Consequently, the stock can continue to decline further. Therefore, it's prudent to purchase shares in a "step-wise" fashion for an overall lower average cost.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: As a medical doctor/market expert, I'm not a registered investment advisor. Despite that I strive to provide the most accurate information, I neither guarantee the accuracy nor timeliness. Past performance does NOT guarantee future results. I reserve the right to make any investment decision for myself and my affiliates pertaining to any security without notification except where it is required by law. I'm also NOT responsible for the action of my affiliates. The thesis that I presented may change anytime due to the changing nature of information itself. Investing in stocks and options can result in a loss of capital. The information presented should NOT be construed as recommendations to buy or sell any form of security. My articles are best utilized as educational and informational materials to assist investors in your own due diligence process. That said, you are expected to perform your own due diligence and take responsibility for your action. You should also consult with your own financial advisor for specific guidance, as financial circumstance are individualized.